Sun Microsystems remains a work in progress

Andrew LeckeyTribune Media Services columnist

Q: Please clear up my confusion over Sun Microsystems Inc. Does the company have a good future? -- M.L., via the Internet

A: The leading supplier of networked computing products, which stumbled badly for several years after the Internet bubble burst, had $89 million in net income in its first fiscal quarter, which ended Sept. 30.

That marked the first time it recorded four consecutive quarters of profits in more than five years. Cost-cutting, which included significant job cuts, has been paying off. It also is gaining market share in its server and storage businesses.

Yet, overall sales growth continues to be slow and the company predicts low to middle single-digit revenue expansion in its current fiscal year.

Sun Microsystems (JAVA) recently enacted a 1-for-4 reverse split in order to raise its low price. Its stock value has declined 15 percent in 2007, following a 29 percent gain in 2006 and a 22 percent drop in 2005.

The firm does have plenty of cash and a strong balance sheet. An encouraging sign was the $700 million investment in Sun by KKR Private Equity Investors early this year, in which KKR also received a seat on the Sun board.

Sun's businesses include servers, storage, software and services, with two-thirds of its revenues coming from hardware. Its new strategy is to shift away from its longstanding business model of proprietary products.

By open-sourcing its Solaris software and Java software-development platform, Sun believes it can derive more money from hardware and from software maintenance. It has also begun to offer industry-standard x86 computers.

Because results of its changes are uncertain, consensus analyst rating of Sun stock is "hold," according to Thomson Financial. That consists of three "strong buys," four "buys," 10 "holds" and two "underperforms."

An ongoing challenge in the server market is higher-end competitor IBM Corp., with Dell Inc. at the lower end. Hewlett-Packard Co. competes at both ends. These companies have greater financial resources than Sun, which means more product and service depth. Sun also must deal with a growing customer trend of substituting lower-end servers for higher-end ones.

Sun, which has grown largely through acquisitions, remains energetic. It expects to double its sales in China over three years. Japan has chosen it to create an open-source Internet-based architecture to file government forms online. Other nations, including Singapore and Norway, have selected it to manage their information flow.

Earnings are expected to rise 108 percent in its current fiscal year and 32 percent the following year. Its five-year annualized growth rate is projected to be 9 percent.

Q: CGM Focus Fund has had fantastic returns, but I don't often see it mentioned as a good fund to buy. Is it worth considering? -- M.B., via the Internet

A: In most other portfolio managers' hands, this fund would be considered too hot to handle.

But experienced manager Ken Heebner has proven to be bold, intuitive and capable of effectively handling risk. Although his furious trading, big sector bets and concentrated portfolio of 25 or fewer stocks can produce significant sudden drops in value, it is difficult to quibble with his longer-term results.

The $5 billion CGM Focus Fund (CGMFX) is up 84 percent over the past 12 months. It has a three-year annualized return of 38 percent and five-year annualized return of 37 percent. All of those results rank in the top 1 percent of large growth and value funds.

Heebner, who has managed CGM Focus since its inception in 1997, remains the primary reason to invest in the fund.

Industrial materials represent 43 percent of the portfolio and energy 36 percent, and both groups have provided a significant boost to returns lately. The fund also benefited from shorting Countrywide Financial Corp. stock early in the year, based on Heebner's analysis of the subprime lending debacle.

"We recommend CGM Focus because Heebner digs in and backs up his picks with good analysis, but investment in it should be kept to a small portion of an individual's portfolio," said Michael Herbst, analyst with Morningstar Inc. in Chicago. "I would caution not to jump in and then be tempted to sell if it takes a big hit, since you'd miss out on its rebound."

Heebner shifts the fund's market-capitalization emphasis when he sees new opportunities. His continuous portfolio turnover often generates a significant capital gains tax liability for investors.

Q: I don't know much about investing, but I want to open an individual retirement account. I was thinking of buying a life-cycle fund because it seems like a good hands-off approach. Are these funds good? -- F.R., via the Internet

A: Life-cycle funds are definitely best for individual investors who don't want to make asset allocation decisions as time goes by. Studies have shown them to be more diversified and better-performing than the typical investor-chosen portfolio.

These funds offer investors a mix of stocks, bonds and cash that adjusts over the years, mostly to shift from stocks to bonds as the investor ages and moves closer to retirement. There is usually a target retirement date in the fund's name.

Fidelity, Vanguard and T. Rowe Price are among the largest life-cycle fund competitors.

"Because they invest in several underlying funds at the fund company, life-cycle funds are really funds of funds," said Mark Salzinger, publisher and editor of The No-Load Fund Investor newsletter in Brentwood, Tenn. "They're a great way to access several funds with small amounts and obtain cheap diversification."

Life-cycle funds are not well-suited to investors who wish to make their own tactical allocation changes, especially if their life circumstances could change significantly, he said.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.